Introduction

Tough times, tough decisions. But also magnificent opportunities. That’s what a
looming state budget deficit means for Gov. Jennifer Granholm and Michigan’s
newly elected 92nd Legislature. Make no mistake about it: The soft economy and
resulting decline in state revenues will dominate politics in Lansing this year
as officials struggle to fulfill the state’s responsibilities and its
constitutional mandate to balance income and expenses. How officials respond
will be determined by whether they see our situation as a crisis to be survived,
or an opportunity to be welcomed.

State programs will be under the microscope, scrutinized in more detail than
they have been in perhaps a decade. Priorities will be re-examined, and some
programs may be eliminated. Others will be pared back. The state workforce
will shrink. Certain government duties, once regarded as sacrosanct, will be
found to be expendable after all. Adjustments of one degree or another will be
undertaken within all 20 state departments. Ingenious and compassionate private
citizens and organizations will surprise skeptics by expanding or arising to do
what had recently been an activity of the state.

As challenging as the situation may seem, we must keep it in perspective.
First, state government is not the only means, nor necessarily the best means,
for meeting human needs. Second, state government is not the only entity in
Michigan that’s having a difficult time. Hundreds of thousands of Michigan
families, nonprofits, and businesses are, too. Indeed, it’s precisely
because those families and business are in trouble that the state is in
trouble. We should never forget that the state has nothing to spend for anybody
except what it first takes from somebody. And the state’s first priority ought
to be the fiscal health of the hard-working people who, as taxpayers, have to
pay the state’s bills before they pay their own. When they are not unduly
burdened by taxes, they have less need for assistance themselves and more
ability to help those who do need assistance.

All across Michigan, citizens are coping with the challenges of an ailing
economy. And they are coping by re-examining their spending. They are
re-prioritizing, and doing without some things they’d love to have. They are
hiring less, spending less, and taking fewer and shorter vacations closer to
home. They are stretching further the dollars they have, and generally exerting
the discipline necessary to weather the storm. Why should state government not
do the same? In fact, why wouldn’t we welcome this as an opportunity for
officials to demonstrate the discipline and prudence we expect from them?

Another matter that should inform the budget debate in Lansing is the fact that
Michigan families and businesses are shouldering a tax burden that is still
above the average among the 50 states. What we get in exchange is a mixed bag.
We get decent roads and good schools in some areas. But more often than not we
get excessive construction costs, inefficient bureaucracies, and schools that
parents and children are desperate to escape.

Due in large measure to rising property tax rates and assessments, state and
local taxes actually have risen since 1993, the year before Proposal A passed,
from 10.7 percent of total personal income in Michigan to 10.8 percent in 2000,
the most recent year for which numbers are available. The state’s Single
Business Tax exacts a “take” that represents a larger portion of business income
than that of perhaps any corporate income tax in the other 49 states. Even a
May 2002 report from the Michigan Economic Development Corporation showed that
Michigan ranks 16th among 17 peer states in business costs (meaning that 15 of
the 17 states with whom we compete have lower costs). Michigan simply
must make more progress in reducing the financial burdens it imposes on its
workers, families and businesses. Because we live in a competitive and highly
mobile world, we cannot afford to do otherwise.

Gov. Granholm and the Legislature can pursue any
number of courses as they navigate today’s troubled fiscal waters. On the one
hand, they could ignore the difficulties faced by the state’s citizens and
simply raise taxes. That would drive people and businesses elsewhere, and in
the long run undermine the state’s financial health for many years. Until the
early 1990s, that’s what Michigan often did, inspiring the all-too-familiar line
that the last person to leave the state should turn the lights out. On the
other hand, the governor and Legislature could follow the example of most of the
state’s citizens who know what to do when times are tough: Make tough decisions.

There is a magnificent opportunity in these difficult times to make a huge
difference in how state government relates to its citizens — to regroup, stick
to the basics and do them well, and trust the people. This is a time to
strengthen civil society — that network of private institutions, community
associations, schools and religious organizations, families and friends and
coworkers, and all their voluntary, from-the-heart interactions. There is room
for politics in our lives, but most of what enriches and defines us as a
progressive and compassionate people emanates from other, deeper sources.

As government grows, civil society shrinks. When government moves beyond its
core functions, it does not create things out of thin air so much as it
displaces what a free people would choose to do. And it ends up performing too
many tasks too poorly, including the ones we absolutely must rely upon for the
sake of safety and basic, essential services. If this is a radical notion, then
America was founded on radical notions.

For all people interested in the advancement and enrichment of our culture, this
is a crucial observation with far-reaching implications. Cultural progress
should not be defined as taking more and more of what other people have earned
and spending it on “good” things through a government bureaucracy. Genuine
cultural progress occurs when individuals solve problems without resorting to
politicians, or the police and bureaucrats they employ. How can we restore and
strengthen the attitudes and institutions that formed the foundation of American
civil society?

Certainly, we can never do so by blindly embracing government programs that
crowd out private initiatives or by impugning the motives of those who raise
legitimate questions about those government programs. We cannot restore civil
society if we have no confidence in ourselves and believe that government has a
monopoly on compassion. We’ll never get there if we tax away large portions of
people’s earnings and then, like children who never learned their arithmetic,
complain that people can’t afford to meet certain of their needs.

We can advance civil society only when people get serious about replacing
government programs with private initiative, when discussion gets beyond such
infantile reasoning as, “If you want to cut government subsidies for Meals on
Wheels, you must be in favor of starving the elderly.” Civil society blossoms
when we understand that “hiring” the expensive middleman of government is not
the best way to “do good”; that it often breaks the connection between people in
need and caring people who want to help. We make progress when the “government
is the answer” cure is recognized for what it is: false charity, a cop-out, a
simplistic non-answer that doesn’t get the job done well, even though it allows
advocates to believe they’ve done the right thing.

The kind of leadership we at the Mackinac Center for Public Policy hope to see
from Lansing in 2003 and beyond is defined by adherence to the principle
enunciated by Thomas Jefferson in his first inaugural address:

. . . a wise and frugal government, which shall
restrain men from injuring one another, shall leave them otherwise free to
regulate their own pursuits of industry and improvement, and shall not take from
the mouth of labor the bread it has earned. This is the sum of good government .
. .

In accordance with this Jeffersonian principle,
the Legislature and the governor should evaluate each item in the state budget,
asking 12 key questions:

·Does the item weaken communities by
assuming a responsibility best left to private families, charities or firms?

·Does the item duplicate what other
state agencies or the federal government are doing in that area?

·Does the item primarily benefit a
single favored constituency or region rather than the state as a whole?

·Are direct users or beneficiaries
of the service paying a reasonable amount of the cost?

·Does the item create or expand an
“entitlement” that cannot be reasonably withdrawn if necessary or advisable in
the future?

·Has the item received significantly
more money in recent years but not used that money in the most effective way?

·Has the item been funded in the
past by deceptive or inappropriate legislative or executive actions?

·Does the item use taxpayer funds
for political advocacy or to discriminate against racial or ethnic groups?

·Does the item force private
businesses to unfairly compete with the state?

·Does the appropriation growth of an
item exceed the rate of inflation or real personal income growth?

The Mackinac Center for Public Policy recognizes that not all budget cuts are
created equal. Some represent the proverbial “low-hanging fruit” — easy to
reach, if not painless. Other budget cuts would surely entail at least
short-term pain. We encourage readers to consider the potential for
long-termgain — from all the cuts recommended herein, whether they
be “low-hanging fruit” or, to mix metaphors, the “sacred cows” of the Lansing
establishment.

Michigan citizens have reason to be encouraged by the statements made by
incoming Gov. Granholm and her representatives since the November 2002 election
— statements to the effect that she will address the budget deficit from the
spending side and avoid raising the tax burden on still-overburdened
Michiganians. If she follows through and makes the tough decisions required in
these tough times, she will truly display the kind of leadership she was elected
for, and the Mackinac Center for Public Policy will be in the forefront of a
cascade of praise that will be due her.

Scrutinizing every nook and cranny of state government, raising questions about
previously unquestioned premises, thinking creatively about how to do things
better, if the state is to continue doing them at all — these are healthy,
positive attributes of forward-looking leadership in a free society. While some
may approach the state’s deficit with their minds already closed to the concept
of downsizing the public sector, we ask readers of this document to think
progressively. Why must the state do things as it always has? Why can’t — and
why shouldn’t — private people and private institutions do more? Will they
ever do more if we take for granted that they can’t or shouldn’t? With
government at all levels consuming over 40 percent of national income — more
than ever before in our nation’s history — why isn’t now a good time to make a
big difference?

The following analysis
examines the 2003 fiscal year state budget and makes recommendations for fiscal
year 2004. If the legislature adopts the recommendations in this study it will
be able to close the estimated $1.5 billion General Fund/General Purpose (GF/GP)
budget deficit that is expected in fiscal year 2004, with millions to spare.
Adopting every recommendation in this study would reduce overall state spending
by $3.7 billion, which constitutes 14.2 percent of the total state budget. Of
this total, $1,527,814,522 is from the GF/GP portion of the budget. We also
recommend a 50 percent reduction in the state revenue sharing that is not
constitutionally mandated, producing savings of $344,665,000, which should be
redirected to the state’s GF/GP fund. In addition, we recommend the sale of
three state properties worth an estimated $69,600,000, a fee hike worth
$25,280,155, the elimination of the Life Science Corridor Initiative, which
would save another $45,000,000; and use of the $11,500,000 in annual revenue
from the state’s Indian Gaming Compact. Together, these savings and revenue
enhancements exceed $2 billion.

Most complaints leveled against the proposals in this study will fit into one of
two categories. First, people will argue, “Why cut a program that constitutes
such a small proportion of the total budget?” And second, people personally
affected by the program cut, such as recipients of direct subsidies, will oppose
the proposal on the basis that it will affect them disproportionately. Both of
these arguments are easily refuted when examined more closely. In the first
case, while it is quite true that eliminating one program will have little
effect on the overall size of the budget, many of these cuts will certainly
affect some people more than others, but this is not coincidental — it is these
same people who are benefiting disproportionately by the very presence of the
programs. What is unjust or unfair is not the elimination of the programs, but
their creation in the first place.

Over the past 12 years, the
Engler administration took steps to reduce the size of state government. But
there is far more work to be done. It is the Mackinac Center for Public
Policy’s hope that Gov. Granholm will take much of Lansing’s power and return it
to where it rightfully belongs: the homes of families and individuals who are
the citizens of the Great Lakes State.

One final word is of introduction is necessary. It is important to note that
the title of this study is not, “Reducing the Proportion of State Spending Paid
by State Taxes.” A large portion of Michigan’s budget comes from the federal
government. In this study we recommend cutting many expenditures funded
entirely by Washington. The source of the funding is not the issue here.
Restoring civil society requires reducing the role of coercive institutions
(government) and increasing the role of formal and informal voluntary
associations in improving peoples’ lives and solving problems. If a state
function is outside the proper role of government, the fact that the money goes
through Washington first is of secondary importance. “That’s federal money,” is
no excuse for continuing such functions.

A Note On Terminology

Each proposal within this analysis contains information described as the
“appropriation breakdown.” The numbers in these breakdowns refer to the origins
of the funds used to pay for the program. There are four possible areas from
which a program can be funded: Interdepartmental Grants, Federal Funds, General
Fund/General Purpose (GF/GP) Funds, and Special Revenue Funds.

Interdepartmental Grants
are exactly what the name implies: funds transferred from one state department
to another. For example, if the Department of Commerce were to assume some of
the computer processing responsibilities of the Department of Labor, Labor would
issue a grant to Commerce to help pay for the provision of that service.

Federal Funds
are funds sent from Washington to Lansing to subsidize the operations of various
state programs. The source of Federal Funds is, of course, federal revenues,
which are comprised of federal income tax, fuel tax, capital-gains tax, and
tariff receipts, just to name a few sources.

General Fund/General Purpose Funds
are funds gained by the state from three main areas: state personal income
taxes, state sales and use taxes, and single-business and insurance taxes.
These taxes are broad-based and (in theory, if not always in practice) intended
to fund programs that also have broad-based effects.

Special Revenue Funds
are comprised of many different types of state revenues. The most common type
of Special Revenue Funds, however, is targeted taxes, user fees, and regulatory
fees.